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IRS asks for comments on proposed rules for high-cost health plans

To prepare for the new excise tax on so-called Cadillac high-cost
health insurance plans, the IRS is asking for comments on proposed
approaches to creating guidance on issues involving the tax when it
becomes effective in 2018 (Notice 2015-16). The notice focuses on the
definition of “applicable coverage,” how to determine the cost of
applicable coverage, and applying the annual dollar limit to the cost
of applicable coverage. The notice does not discuss calculation or
assessment of the tax, but the IRS says that, before issuing proposed
regulations, it expects to release another notice that will invite
comments on those issues.

Sec. 4980I, enacted as part of the Patient Protection and Affordable
Care Act, P.L. 111-148, imposes an excise tax on insurers (including
employers with self-funded plans) if the aggregate value of
employer-sponsored health insurance coverage for an employee
(including, for purposes of the provision, any former employee,
surviving spouse, and any other primary insured individual) exceeds a
threshold amount. The tax is equal to 40% of the excess benefit, i.e.,
the aggregate value that exceeds the threshold amount. For 2018, the
threshold amount is $10,200 for individual coverage and $27,500 for
family coverage, multiplied by the health cost adjustment percentage
(as defined in Sec. 4980I) and increased by the age and gender
adjusted excess premium amount (also defined in Sec. 4980I).

Sec. 4980I(d)(1)(A) provides that applicable coverage means coverage
under any group health plan the employer makes available to the
employee that is excludable from the employee’s gross income under
Sec. 106 (or would be if it were employer-provided coverage). The cost
of applicable coverage is determined under the same rules that apply
to Sec. 4980B for COBRA continuation coverage.

The IRS explained that, to determine the cost of applicable
coverage, it anticipates that employer contributions to health saving
accounts (HSAs) and Archer medical savings accounts (Archer MSAs),
including salary reduction contributions, will be included in
applicable coverage, and employee after-tax contributions to those
accounts will be excluded.

In addition, the cost of on-site medical clinics will be included in
applicable coverage only if they provide benefits beyond first aid to
employees during working hours, although the IRS is requesting
comments on how to determine whether the costs of these clinics should
be included.

The IRS is also requesting comments on its proposal to exercise its
regulatory authority to exclude the cost of employee-assistance
programs from the cost of applicable coverage under Sec. 4980I, even
though they are not specifically excluded under the statute.

Finally, the notice contains an in-depth discussion of how to
determine the cost of applicable coverage under the proposed rules,
which will be similar to the rules for determining the cost of
coverage under COBRA. The cost of that applicable coverage for an
employee will be based on the average cost of that type of applicable
coverage for similarly situated employees.

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